Thursday, October 9, 2008

Iceland’s Financial Services Authority has nationalised the Kaupthing Bank as a response to the financial crisis which may result in a total collapse of the nation’s economy.

Kaupthing, together with Glitnir Bank and Landsbanki, owe a total of US$61 billion, which is twelve times the estimated size of the economy of the Nordic country. The Financial Services Authority says Iceland will guarantee all domestic deposits and aims to provide a “functioning domestic banking system” by management of the banks.

Iceland has asked for aid to Russia and the International Monetary Fund for loans to help guarantee these deposits. Icelandic equity markets have been closed until October 13 due to “unusual market conditions” and the Icelandic krona now appears to have itself failed after the collapse of an attempt to fix the exchange rate at 131 Krona to the euro.

According to Nordea Bank, Scandinavia‘s biggest lender, there was no trading of krona on the spot market today. The most recent figure for exchange is 340 to the euro, compared to 122 last month. Thomas Haugaard Jensen, an economist of Svenska Handelsbanken in Copenhagen, indicated the Icelandic economy seems to be at the verge of a “total collapse,” and predicted it will take several years before Iceland’s economy recovers enough for it to return to growth.

Kaupthing itself requested the national takeover, which leaves most of the nation’s banking sector under state control. The bank’s board have resigned and left the authorities in control of the bank. The bank also has affiliates both in Sweden and Finland. Swedish Kaupthing Bank Sverige claimed to be unaffected, but Finland’s Financial Services Authority temporarily shut down the Finnish affiliate.